The Corporate World

Corporate restructuring can take a variety of forms, from fully effective to mere ineffective. In some cases, however, the overall effect of the restructuring is a wind-up operation, or a sale of assets to pay down outstanding debts. Or it can even be more indirect, as in the case of hybrid approaches which combine restructurings with tax cuts.

In most cases, corporate restructuring has followed the same lines as recent history has shown. For instance, Fannie Mae has put its mortgage unit into conservatorship and turned it over to Freddie Mac, the Federal National Mortgage Association. The concept of corporate restructuring is not new at all. It has been going on for many years.

Where the strategy has changed is the method that it has used, that is, using debt and stock for the purpose of buying out company assets, when in the past such a common solution was difficult. And so, the changes have come in the form of debt and stock that are not readily apparent. Since so much of what was needed to be fixed could not be done through cutting costs or reorganizing the workforce, the company needs to get money somewhere. There are two ways that this can be done: the approach can be to raise money through new equity investment, or by raising funds through debt.

Of course, the money raised through debt is easy to raise; many companies can raise cash through debt, including pension funds, insurance companies, insurance and investment companies. But while the stock market will raise money as well, there is another way to raise funds. That way is through dividends from an existing stockholders' equity.

A company can raise capital from its existing stockholders by converting an ownership interest in a corporation into equity. Once that ownership interest is converted, the new owners of that ownership interest are able to, if they wish, buy additional shares of the corporation. They may do this directly from the corporation's books, or through the intermediary of a subsidiary of the corporation.

Thus, if the share holders' equity becomes due, the shareholders, by voting in favor of such a proposal, will also gain new shares. This is the core concept of a dividend. Dividends are seen as positive by investors, in spite of the fact that the shareholders actually own no stock.

In addition to giving the shareholders an opportunity to invest, the amount of the dividend is decided by the shareholders. In some cases, this is in proportion to the number of shares they own. In other cases, it is calculated on a formula that is based on the volume of ownership of the shares.

In any case, the number of shares that a particular share holder owns will be counted as part of the total number of shares owned by the shareholders. After all, a dividend has no other goal than to reward shareholders.

The Board of Directors of the corporation determines the total amount of the shareholders' equity by dividing the outstanding shares by the outstanding number of shares. The dividends are then paid out on a quarterly basis.

What does this actually result in? In any case, a properly designed and executed corporate restructuring will yield positive results. There are certain benchmarks, however, that need to be met.

One of the most important benchmarks that needs to be met is the amount of credit available. Many companies use shareholder equity as a measure of the amount of credit that they need, and if they do not have adequate amount of equity, their restructuring will most likely not yield positive results.

The third important benchmark is the success of the restructuring in eliminating the actual problem. While no company would want to risk their reputation by performing poorly in their restructuring, the ultimate aim of any restructuring isto bring down the outstanding debts. If the restructuring did not achieve its objective, the company's shareholders will lose their investments.

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